Two Former Bear Stearns Execs Indicted for Fraud

Ralph Cioffi, 52, and Matthew Tannin, 46, ran two funds at Bear’s asset management unit, which lost bets on sub-prime mortgage-backed securities, The Financial Times reports.

The two have been indicted for mail fraud and conspiracy to commit securities fraud, marking “the first prosecution in a U.S. crackdown on subprime fraud,” according to Bloomberg.

Investors lost $1.6 billion when two hedge funds managed by Cioffi and Tannin imploded in June last year and then collapsed. The funds were invested in securities linked to sub-prime mortgages. One of the issues in the investigation is whether the two men, who were optimistic about the funds only weeks before the collapse, intentionally misled investors.

Their arrests are the latest in the Bear Stearns drama. In March, JPMorgan Chase bought the troubled firm for $2 a share, almost 99 percent below Bear’s all-time high trading price of $172.61 per share, set in January 2007.

If convicted, Cioffi and Tannin face up to 30 years in prison.

“The arrests are appropriate given the magnitude and the egregiousness of their alleged misconduct,” said attorney Steven Caruso, who is representing investors in arbitration claims against the funds.

The collapse of the two funds managed by Cioffi and Tannin—the Bear Stearns High-Grade Structured Credit and Enhanced Leverage funds—was a major blow for Bear Stearns. The firm struggled for survival until it was bought by JPMorgan Chase in March.

Bloomberg reports that Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer. Prosecutors are focusing on an e-mail the two allegedly sent that said the funds were headed for trouble, four days before they told investors they were comfortable with the funds.

JPMorgan Chase announced it was buying Bear Stearns for $2 a share on Sunday, March 16. The price valued Bear Stearns at $236 million, more than 90 percent below Bear Stearns’ closing price the previous Friday.

It appeared that Samuel Israel, cofounder of the Stamford, Conn. hedge fund Bayou Group LLC, had committed suicide while on his way to a Massachusetts prison to begin serving a 20-year sentence for fraud. But no witnesses saw anyone jump off the bridge where Israel parked his car and no body has been found, so authorities now believe he’s on the run.